New Frontier Airlines: Questions, Answers--And More Questions

Wed, 2012-12-26 18:59

An investment group that says it has $400 million in backing went public with its aspirations to acquire Denver-based Frontier and create a second hub for the low-cost carrier in New Orleans--if only it can get the backing of the city's mayor.Over the years, I have learned to view any talk of a start-up airline or investor group to acquire one with caution, because so often they do not pan out. I talked to the man behind this effort last week, but at this point, New Frontier is not overcoming my skepticism, for several reasons.

Cranky Flyer enumerates a lot of flaws in the business plan, which includes connecting with the six other commercial airports in Louisiana three times a day, using 76-seat regional jets, and offering at least 125 flights a day. John Miller, managing principal of M7 Capital, says he and other participants have been exploring this idea for five years, but lost the original investor in the Great Recession. He says he has two groups committed to providing $400 million, but will not say who they are, which always raises a red flag.

Those flights from other Louisiana airports to the hub all will cost $50-$60 one way, Miller says. He also contends the airline as a whole will be able to break even by filling just 65% of its seats without charging any one-way fare above $300 and a walkup fare that is no more than 15% higher than the average fare on a given route.

That would stimulate a lot of traffic, to be sure. But I cannot really figure out how he proposes to do that and make money. Frontier is trying to become an "ultra-low cost carrier," but Miller says he would reverse that, and the airline does not plan to charge change fees or bag fees. Saying the airline can break even at 65% load factor does not make it so. Miller says the cost per enplaned passenger at the New Orleans airport is so low that it can work, but there are plenty of other airlines already operating at the airport that I expect will find that difficult to believe. The New Orleans Times-Picayune quotes the director of New Orleans' airport as saying the airport suffers from a demand problem, not a supply one.

The newspaper also quotes Aimee Quirk, the mayor's adviser on economic development, as saying the city has not been able to get any firm data from the group to back up the business plan, or sufficient route analyses.

All of that said, I am always reluctant to dismiss a new airline or new airline business idea entirely. Las Vegas-based Allegiant Air, for example, found a very profitable niche acquiring cheap MD-80 aircraft to connect small communities to major U.S. leisure destinations with low-frequency service, emphasizing the selling of travel packages, which is not an idea someone else thought viable before. The Louisiana Economic Development office did sign a memorandum of understanding in 2010 to subsidize New Frontier for every "incremental passenger" it creates for the city after reaching 125 daily flights, because of the tax revenue the additional visitors would generate. But Miller says that deal will need to be revised--another cautionary sign for me.

"We realized we can't wait any longer [for mayoral support]. That's why we went public," Miller says. He acknowledges that some people call the business plan "crazy," particularly all of those regional flights to feed the hub. I will not go so far as to use that term, but he did not convince me that I should not be very skeptical.